Monday, February 25, 2008

An Article in the Hindustan Times of February 25, 2008 highlights that by announcing a 3:5 bonus to shareholders, less the promoters, of Reliance Power, Anil Ambani has given up Rs 5000 crores of his personal wealth to them!

This paying of $1.2 billion ‘from his pocket’ is ostensibly to enable shareholders of Reliance Power to make up the losses that they suffered on the listing of this most sought after stock in what has been India’s biggest IPO so far. As a result of the bonus issue, the cost of each share will come down to Rs 269 for retail investors and Rs 281 for institutional investors, a 40 and 37 percent discount respectively from the IPO price that they had initially paid.

Not willing to admit that he too allowed greed to overtake the business ethics expected from one of the richest men in the world, particularly when he was playing with the hard earned money and confidence of lakhs of small investors, Anil Ambani blamed “vested interests” for deliberately bringing down the price of the scrip on listing! If he is to be believed, the IPO price of Rs 430 for retail investors was justified!

A brief look at some figures will reveal that the company has zero installed capacity as on date with an expected generation capacity of 6,000 MW by 2011 and 26,000 MW by 2016. A revenue of Rs 7,700 crores is expected by 2012, translating into an expected EPS of Rs 8 and a book value of Rs 70 during that year. The IPO price was, thus, at a 2012 PE ratio of 52 and a price to book value ratio of above 6, four years into future! Before the IPO hit the market, its active grey market price was as high as Rs 900! With the prospect of doubling their money on listing, lakhs of applicants took loans to apply for the share.

Anil Ambani found nothing wrong when the grey market was showing sheer madness completely de-linked from reality! On the contrary, he was then happy selling this unreal dream to unsuspecting investors who had always benefited by investing in Reliance, and possibly happier watching his paper riches exploding to make him richer than elder brother and rival Mukesh! When the bubble burst, as many sane analysts had been warning all along, he promptly blamed vested interests for giving the much needed reality check at great cost to many small investors.

This ‘gift’ of $1.2 billion is, therefore, not from Anil Ambani’s pocket. He is paying nothing at all. On the contrary, he is only returning a small part of the investors’ money he himself had pocketed with some avarice by pricing the issue much above its fair value.

This bonus issue will be of no use to the many small investors who had borrowed to invest in the IPO, as they would have sold out at a loss on listing. The number of investors post listing has increased, as Anil Ambani has noticed, but that is because savvy investors have subsequently picked up the share much cheaper than the IPO price. They are the ones who will gain, not the original investors.

Dhirubhai Ambani, the visionary who painstakingly gained the faith and trust of millions of small investors, will be a sad man today. Anil, his younger son has, in one stroke of personal greed and megalomania, broken that bond of trust that the Reliance brand had built over decades. There is a price that will have to be paid by the breakaway Anil Dhirubhai Ambani Group (ADAG) that Anil heads today for this one act, its first direct interact with the investing public after its severed its ties and logo with the empire built painstakingly over more than three decades.

There is also a warning signal hidden somewhere in this fiasco on the abilities and motivations of Anil Ambani. What is the slogan of the ADAG? “Think Bigger Think Better.” Am I seeing something here that is not there or is it apparent to many? Think bigger and better than whom? I can’t see any one else that Anil has in his mind other than elder brother Mukesh who heads the original empire created by his father and who is carrying on that legacy without either changing the logo or the slogan to loudly show his own name.

Is this slogan not pettily competitive at best and does it not carry within it an element of destructiveness?

Did the atrocious pricing of the Reliance Power issue have something to do with the logical corollary coming out of the ADAG slogan: Get Richer? Than Mukesh, of course! Anil’s motivations seem to driven more by his consuming ambition to do better and get richer than Mukesh rather than sound business sense and responsibility.

Mukesh, on the other hand, has consistently shown that he is the true inheritor of his father’s vision, a leader always thinking about, and capable of, bringing transformational changes. Let us not forget that Reliance Communications, the jewel in the ADAG crown, was Mukesh’s creation; it fell ripe into Anil’s lap at partition time. Anil has yet to show the wisdom, vision and sagacity displayed by Mukesh in leading his father’s company into a new growth path that will continue to bring cheer and profit to all stakeholders who have reposed confidence in his leadership.

The Reliance Power fiasco is the first big chink that has been exposed in Anil’s Ambani’s flamboyant armour. I cannot shake the feeling that it may not be the last. There is something disturbingly different about the way he is going about expanding his group at a furious pace; indeed his personal forays are also a radical departure from what his father taught and practiced.

The one lesson for investors is that they should clearly understand that Reliance Industries and the Anil Dhirubhai Ambani Group are now two entirely different entities, notwithstanding their common brand and surnames. That remembrance will help them in future to take informed investment decisions grounded in reality rather than floating on hype.